The Rules of Insurance Policy Construction are Alive and Well

Two well-established judicial rule of insurance policy construction are that (1) clear and unambiguous policy language must be enforced as written, and (2) the entire policy must be construed together so as to give force and effect to each clause. See, e.g., Transcontinental Ins. Co. v. Washington Pub. Utils. Dists.’ Util. Sys., 111 Wn.2d 452, 456, 760 P.2d 337 (1988). Recently, the Washington Court of Appeals, Division One, had the opportunity to enforce these rule when it considered the appeal of Lui v. Essex Ins. Co., 2015 WL 1542380 (Wash. Ct. App. April 6, 2015).

Lui involved a commercial building, the space of which was rented out by its owners. In January of 2011, the building suffered water damage caused by a frozen pipe which burst. At the time of the incident, the building did not have any tenants. The last date on which the building had tenants was January 7, 2010.

The insureds subsequently made a claim to Essex, their property insurer, for the water damage. Essex initially paid almost $300,000 for the damage. After making this initial payment, however, Essex learned that the building had been vacant at the time of the burst pipe. Essex then denied coverage, although it declined to seek any reimbursement of the previously-paid funds. Essex denied coverage based on a Change of Conditions Endorsement, which stated that “[e]ffective at the inception of any vacancy or unoccupancy, the Causes of Loss provided by this policy are limited to Fire, Lightning, Windstorm or Hail, Smoke, Aircraft or Vehicles, Riot or Civil Commotion, unless prior approval has been obtained from the Company.” The denial was based on the fact that the building was vacant at the time of the damage and because the cause of the loss, a burst frozen pipe, was not a cause of loss under the Change of Conditions Endorsement.

The insureds sued for the remainder of the damage, which had not paid for by Essex. The parties filed respective motions for summary judgment. The insureds argued that the Endorsement did not become enforceable until 60 days after the vacancy began, relying on a separate part of the Policy. Essex argued that the Endorsement became effective on the first day the building became adequately vacant. The trial court denied Essex’s motion and granted the insureds’ motion.

On appeal, Division One, relying on the two well established rules of policy construction, reversed the trial court’s decision and granted summary judgment in favor of Essex. Division One held that the only reasonable interpretation of the Endorsement was Essex’s, stating that the insured’s interpretation failed to consider the word “inception” in the Endorsement. Using the plain and ordinary meaning of “inception” from a dictionary (yet another rule of policy construction!), Division One found that the Endorsement’s limited covered causes of loss became effective on the first day the building was vacant, and that a burst frozen pipe was not covered under the Endorsement. Thus, there was no coverage as a matter of law. Well done, Division One!